Will a tax-free savings scheme encourage you to save?

The idea sounds appealing. The new tax incentivised savings product, proposed in October 2012 and in this year’s budget, will enable you to earn interest, dividends and any capital gains tax free. However, this scheme will only be introduced in 2015 and details about how the product will work are still sketchy.


What we do know is that the product is aimed at low to middle income earners to encourage them to save more. The proposed combined annual limit will be R30,000 and there's a lifetime limit of R500,000 per individual.


Who will offer it?
Banks and investment houses will be able to offer tax-incentivised savings accounts that will be either interest-bearing or non-interest-bearing. According to Aneesa Razack, head of strategy at FNB Investment Products, this will include bank deposits, retail savings bonds and collective investment schemes, such as unit trusts and exchange traded funds. Property assets, such as real estate investment trusts and property loan stocks, also fall under this umbrella of savings accounts.


She explained that consumers will be entitled to withdraw their savings at any time, but the limit on contributions will not be recalculated to take account of the amount withdrawn. For example, if you saved R150 000 and later withdrew R50 000 of what you contributed, you could only add another R350 000 before reaching the R500 000 limit.


“Another proposal is that, in contributing to the savings account, you would use money on which you had already been taxed, so you would not be able to claim a tax deduction on your contributions. However, all your earnings from the account – interest and dividends – as well as any capital growth would be exempt from tax,” said Razack.


The savings conundrum
According to the National Treasury’s 2012 paper on ‘Incentivising non-retirement savings’, South Africa’s low savings rate is a policy concern, both in terms of individual household savings and the overall national savings rate. It also states that an increase in the level of saving is an important part of the economic policy agenda of government.


This was a sentiment echoed by African Bank’s executive director Nithia Nalliah at last week’s (28 February 2013) National Budget Breakfast held in Johannesburg. “South Africa rates very low when it comes to savings by world standards. We also realise that it is difficult to ask someone to save who doesn’t even have money for their day to day living expenses,” said Nalliah.


One of the solutions he made was to create a retirement fund for people who either resigned or were retrenched from their previous jobs. “You cannot tell a 45-year-old who loses his job to come and collect their pension at the age of 65 years. How will they live until then?” said Nalliah.


Are tax-free savings products the answer?
South Africa is not the first country to implement tax-incentivised vehicles to encourage household savings. Belgium has a tax preferred cash deposit scheme, while Canada has more targeted incentives that include an Education Savings Plan and a co-contribution scheme, which is also geared at saving to fund education.


The United Kingdom introduced Individual Savings Accounts (ISAs) back in April 1999. Investors can put their savings into cash or stocks and shares. All returns are tax-free and funds can be withdrawn at any time. Participation is regulated through contribution limits. Statistics indicate a significant take-up ISAs, with a substantial proportion of savers coming from low-to-middle income categories.


But despite alternative savings options only around 155 000 of the 13,7 million registered tax payers in South Africa still use traditional retirement annuities as the preferred vehicle for saving toward their retirement.


According to Razack the complexity of the product (both pre and post retirement), perceived risk, high fees and lack of capital guarantees put many savers off.


“Current legislation limits banks in terms of providing tax efficient retirement solutions to our clients. We know that many of our clients prefer and currently use bank products to save toward their retirement mainly because of the simplicity, accessibility and capital guarantees such products provide.


Countries that have managed to create a high savings culture, succeeded through creating awareness and incentivizing such savings. We sincerely believe that these [tax free] incentives are certainly a positive step toward creating a savings culture in South Africa,” said Razack.